What type of risk is unique to a specific company or industry?

Unsystematic risk is specific to a particular company or industry. This type of risk is associated with factors that can affect a single organization, such as management decisions, operational risks, industry regulations, or competitive pressures. Because this risk is unique to individual firms or sectors, it can be mitigated through diversification. When investors hold a diversified portfolio, the impact of unsystematic risk is lessened, as poor performance in one company may be offset by better performance in others.

Systematic risk, in contrast, affects the entire market or economy and cannot be eliminated through diversification. This includes risks related to economic cycles, interest rates, inflation, and geopolitical events. Market risk is a broader term that encompasses systematic risk and can affect the overall performance of a portfolio. Credit risk pertains to the potential that a borrower will fail to meet obligations in accordance with agreed terms, which is also not unique to a specific company or industry but rather related to the financial health of borrowers in general. Thus, the identification of unsystematic risk as specific to a company or industry is critical for understanding how to manage investment risks effectively.